Beginner Investing/Annuities

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QUESTION: Hello:

Are variable annuities or any annuity a good investment?  Most if not all money that is used to fund an annuity has already been taxed from taxes on a person's paycheck, federal taxes and state taxes, etc.

If this money is invested in an annuity and later withdrawn, is it taxed again, not just the amount that it earns?  So, it appears that the money may be double taxed.

I thank you for your reply and comments.

ANSWER: Variable annuities are expensive, so I would say that they are not good investments. When you annuitize and start receiving payouts, only the earnings portion of the payout is taxed. The principal portion of the payout is not taxed.

I hope this helps.

Michael Weiss, CFA
Owner
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---------- FOLLOW-UP ----------

QUESTION: Hello:

I want to thank you for your reply.

I assume that all annuities, not just variable annuities, do not tax the principal portion of the payout.

Yes, variable annuities are somewhat expensive to own, but so are 401K plans and hiring a money manager from a trust company or a brokerage firm to manage funds in the account.

Some mutual fund companies have low cost variable annuities.  It is wise to shop around and find a lower costing variable annuity.

I want to thank for your reply and comments!

Answer
Certainly there are other products with high fees but I would not recommend investing in those either, unless there were other special benefits. 401Ks often have other benefits such as a match from an employer. If you are going to invest in a variable annuity, then you should shop around.  

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Michael Weiss, CFA

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I am the owner of Series 7 Exam Tutor , a financial tutoring business that provides personalized tutoring for the Series 7 Exam, the Series 6 Exam ,the Series 65 Exam, the Series 66 Exam, the Series 63 Exam and the Series 24 Exam . I also offer tutoring for finance courses. For additional information, please visit, Finance Exam Tutor. Prior to launching Series 7 Exam Tutor, I worked in investments for 20 years with the majority of this time focused on investment analysis and portfolio management. I have worked for large companies such as Merrill Lynch and Evergreen Investments and have also worked for smaller firms as well. Throughout my career, I have sought to mentor younger colleagues whenever possible, especially those enrolled in the CFA program. I completed the CFA program in 2002 after passing all three exams on the first try. I also passed the Series 7 Exam with a score of 94%. For additional information about me, you can visit the links below:
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M.B.A. in Finance & Investments from the Zicklin School of Business at Baruch College and a B.A. in Finance & Economics from the City University of New York Baccalaureate Program.

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